Financial stocks retreat as Fed holds rates steady

Prospect of better profitability dims at Japanese banks

TOKYO -- The wind has been taken out of Japanese financial stocks' sails after the U.S. Federal Reserve elected to keep interest rates steady, deflating hopes that profitability will soon recover at banks.

"Deflationary forces have been replaced by reflationary ones," European Central Bank President Mario Draghi said on June 27. Many took his statement to signal the start of Europe's withdrawal from monetary easing, sending interest rates and bank stock prices higher worldwide. New hope surfaced for Japanese banks suffering from the Bank of Japan's negative interest rate policy, which has squeezed margins by reducing the spread between the rates that banks borrow and lend at. In the month since Draghi's statement, the Nikkei subindex for banks rose as high as 3%.

However, financial issues have taken a spill over worries that the Fed will not touch interest rates due to growing uncertainty about the Trump administration. U.S. interest rates fell after the Federal Open Market Committee meeting on Wednesday revealed that inflation had ticked up only slightly. "It will take time for Japan to escape deflation since prices are not even rising in America," said Ichiro Yamada of Fukoku Mutual Life Insurance.

In Japan, the indefinitely delayed merger between Fukuoka Financial Group and Eighteenth Bank has "dimmed hopes for regional bank reorganization as well," according to Masahiro Ichikawa from Sumitomo Mitsui Asset Management. Now the Nikkei banking subindex has retreated back to the levels seen before Draghi's statement.

U.S. bank stocks have also suffered due to low long-term interest rates. Goldman Sachs' fixed-income trading revenue for April-June quarter was down 40% year on year. Even as the Dow Jones Industrial Average has continued to log record highs, Goldman's stock price has dropped 7% since the beginning of the year.